Weak corporate earnings provide further warning of recession

Estimates for corporate earnings in the third and fourth quarters of this year “have been dropped to levels not seen since the days of the 2008 financial crisis, below even the muted 2 percent expected level of inflation,” according to a CNBC report. This led Nicholas Colas, chief market strategist at ConvergEx, to warn “we are fast approaching levels where these estimates are unambiguously pointing to the risk of a U.S./global recession later into 2012 and 2013.”

The most recent quarterly earnings reports showed companies barely meeting dramatically reduced projections, with the tech sector in particular doing better that some of the worst-case forecasts for the second quarter. However, there appears to be a growing consensus among analysts that the remainder of the year will be marked by extremely poor earnings.

Bank of America actually thinks most other analysts have been too optimistic. In particular, they think the rosier projections are underestimating the bunker mentality settling in among corporate management as the U.S. government heads for the “fiscal cliff” of a debt crisis. They also suspect a series of “false dawns” – a series of media-fueled bursts of short-lived economic optimism, popping off fairly constantly over the past three years – have eroded the confidence of business leaders. As noted at ZeroHedge, 22 of the 30 most important economic indicators tracked by Bank of America analysts missed expectations – and one of the eight that met expectations did so because of some “seasonal adjustment” fiddling with the numbers.

Class warriors clapping their hands with glee over this news should remember that earnings = expansion = jobs. Poor earnings lead to cost-cutting, which very frequently means work force reductions. As Colas explained to CNBC, “When corporations feel the pinch from a slower economy, they lay off workers,” Colas said. “When they lay off workers the Fed executes on its dual mandate and increases liquidity. And when the Fed increases liquidity, stocks go up.”

This is why Colas thinks stock prices have been doing well, even as corporate earnings plummet: investors are convinced the government will respond to America’s economic slowdown with another round of quantitative easing. However, CNBC suggests those strong stock prices might be one reason we don’t see a third round of QE, because “Fed Chairman Ben Bernanke favors the stock market as a gauge of economic health and the vehicle for a wealth effect that boosts sentiment.”

And here I thought making big money was evil, according to this Administration – especially in the stock market, where fortunes are made by shuffling paper around!

Economic growth involves a complex interaction between numerous factors. The great delusion of politically motivated central planners is that some elements of the free market, such as job creation, can be sustained while other elements get whacked with tax and regulatory hammers. The vision of Obamanomics is a mystical fantasy land with plenty of jobs, but no individuals or corporations are making big profits, and entrepreneurial opportunities are chosen from a very short menu of government-approved, hyper-regulated options… while a perpetually growing government enjoys endlessly increasing revenue from the dwindling tax base of a collapsing private sector.

The real world doesn’t work that way. “I do think at a certain point you’ve made enough money,” the President famously remarked in 2010. We’re on the verge of discovering what the grey and exhausted world of his dreams looks like.